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Indian Currency Chaos

12/7/16 | Rahil Modi | Regular Correspondent

On the Surface

Early in November, Indian Prime Minister Narendra Modi withdrew India’s largest currency notes from circulation. He banned the 500-rupee and 1,000-rupee notes, worth $7.50 and $15 respectively, which account for 86% of the cash in circulation. The ban was designed to fend off corruption, forcing Indians who hold large amounts of cash to make deposits in order to make legalize their assets. Unfortunately, the ban had many harmful consequences; It has left India in a state of unrest, and raises many about the nation’s economic future.

Impacts: the poor and working class

The sudden high-value currency ban has proved especially harmful to the poor. For poor Indians, currency notes are essential. Rent, groceries, and other daily necessities are often paid in cash. Furthermore, cash-based businesses and services, such as rickshaws and street vendors, will continue to dwindle. Wealthier Indians will turn away from these services, fearing vendors won’t provide correct change.

The working-class has also felt the impacts Modi’s move. The lack of transparency between government officials and financial institutions has created unruly, long lines outside of ATMs, banks, and understaffed post offices (now authorized to exchange obsolete currency for new notes). The Indian media outlet, NDTV, reported that at least five people have died waiting in line to exchange currency, and at least three ill children have gone untreated because hospitals refused to accept outdated notes.

Due to the ban on 500-rupee and 1,000-rupee bills, the 100-rupee now holds the greatest value. In effect, this leaves the world’s seventh-largest economy trading with dollar bills.

Will the new currency system solve problems?

Prime Minister Modi’s long-term currency system involves replacing the 1000-rupee note with a 2000-rupee note, and replacing 500-rupee note with a larger bill of the same value. Although Modi is trying to spur growth and curtail corruption, the new bills will take time to configure and circulate. This means, at least in the short-term, problems will continue.

Moreover, it’s likely that corruption will persist even in the new system. Some estimate that the 2000-rupee note will in fact increase the likelihood of illegal holdings due to its greater appreciation.